Your Opinion: When to start pay off Mortgage?

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Frugalbear
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Your Opinion: When to start pay off Mortgage?

Post by Frugalbear » Thu Dec 26, 2019 7:42 pm

In your opinion, when is it the right time to start to focus on paying off your mortgage?

Is there certain financial milestones one should hit prior? If so, explain.

ThankYouJack
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Re: Your Opinion: When to start pay off Mortgage?

Post by ThankYouJack » Thu Dec 26, 2019 7:45 pm

That’s very broad. It depends on the person and situation.

To start with what is the interest rate?

stan1
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Re: Your Opinion: When to start pay off Mortgage?

Post by stan1 » Thu Dec 26, 2019 7:49 pm

There is no single right answer, so here is my opinion (and what we did)

Build up to maxing out all retirement savings accounts (all 401Ks, IRAs)

Refi if rates drop (we did 5 or 6 between 1998 and 2010)

Start building up a taxable investment account

Once taxable account was equal to roughly one year's salary we started making first one then two extra payments per year.

Once loan balance was below roughly 25% of taxable account value we paid off the loan from the taxable account.

Your situation is different though.

bluebolt
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Re: Your Opinion: When to start pay off Mortgage?

Post by bluebolt » Thu Dec 26, 2019 7:51 pm

ThankYouJack wrote:
Thu Dec 26, 2019 7:45 pm
That’s very broad. It depends on the person and situation.

To start with what is the interest rate?
And to continue,
How old are you?
How much do you make per year?
How big is your mortgage relative to your other savings/investments?
How many years do you plan to continue working?
How many years into your mortgage are you? What is the term? Is it fixed or adjustable?
What does your portfolio look like? What is your risk level? What is your expected return?

mortfree
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Re: Your Opinion: When to start pay off Mortgage?

Post by mortfree » Thu Dec 26, 2019 7:53 pm

Paying off and paying down are not the same thing.

Paying down the mortgage early on has a greater impact on the amount of interest you will pay and reducing the number of payments.

Previously when I hit 100k left on a mortgage I focused on aggressively paying it down and then made the last payment in 3 years. Total length of having a mortgage was 10 years. I was 39

Then I found bogleheads and realized they probably would have told me not to pay that off.

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JAZZISCOOL
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Re: Your Opinion: When to start pay off Mortgage?

Post by JAZZISCOOL » Thu Dec 26, 2019 8:14 pm

OP,

You will get a wide variety of answers on this. Everyone must customize the answer for their situation.

Many BH's and some financial advisers recommend being mortgage-free in retirement but I think it depends on your risk appetite and other factors (e.g. size of your investment portfolio, income, other debt, etc.). Mortgage rates are very low right now and some of us are not as risk-adverse to a moderate amount of leverage as others are. Also, some people in the US still have a tax deduction.

One thing I like about BH is that you will get a variety of opinions and I believe that is a good thing. :happy

acegolfer
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Re: Your Opinion: When to start pay off Mortgage?

Post by acegolfer » Thu Dec 26, 2019 8:22 pm

mortfree wrote:
Thu Dec 26, 2019 7:53 pm
Then I found bogleheads and realized they probably would have told me not to pay that off.
Do you regret paying off early?

gmc4h232
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Re: Your Opinion: When to start pay off Mortgage?

Post by gmc4h232 » Thu Dec 26, 2019 8:27 pm

acegolfer wrote:
Thu Dec 26, 2019 8:22 pm
mortfree wrote:
Thu Dec 26, 2019 7:53 pm
Then I found bogleheads and realized they probably would have told me not to pay that off.
Do you regret paying off early?
Paid mine off this June. Let's just say it hasn't yet crossed my mind to go out and get another one...

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JoeRetire
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Re: Your Opinion: When to start pay off Mortgage?

Post by JoeRetire » Thu Dec 26, 2019 8:28 pm

Frugalbear wrote:
Thu Dec 26, 2019 7:42 pm
In your opinion, when is it the right time to start to focus on paying off your mortgage?
It depends on your mortgage rate. And it depends on your investment returns. And of course it depends on how much sleep you are losing due to having a mortgage.

These days the right time to start to focus on paying off your mortgage is never, IMHO.
Last edited by JoeRetire on Thu Dec 26, 2019 8:32 pm, edited 1 time in total.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

mortfree
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Re: Your Opinion: When to start pay off Mortgage?

Post by mortfree » Thu Dec 26, 2019 8:31 pm

gmc4h232 wrote:
Thu Dec 26, 2019 8:27 pm
acegolfer wrote:
Thu Dec 26, 2019 8:22 pm
mortfree wrote:
Thu Dec 26, 2019 7:53 pm
Then I found bogleheads and realized they probably would have told me not to pay that off.
Do you regret paying off early?
Paid mine off this June. Let's just say it hasn't yet crossed my mind to go out and get another one...
Moved unexpectedly a year later.

30-year, 3.875% 200k mortgage now down to 183k (in 2 years).

So only regret is having to go through that process again.

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JoeRetire
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Re: Your Opinion: When to start pay off Mortgage?

Post by JoeRetire » Thu Dec 26, 2019 8:33 pm

mortfree wrote:
Thu Dec 26, 2019 8:31 pm
gmc4h232 wrote:
Thu Dec 26, 2019 8:27 pm
acegolfer wrote:
Thu Dec 26, 2019 8:22 pm
mortfree wrote:
Thu Dec 26, 2019 7:53 pm
Then I found bogleheads and realized they probably would have told me not to pay that off.
Do you regret paying off early?
Paid mine off this June. Let's just say it hasn't yet crossed my mind to go out and get another one...
Moved unexpectedly a year later.

30-year, 3.875% 200k mortgage now down to 183k (in 2 years).

So only regret is having to go through that process again.
So no longer mortfree?

Just curious - why didn't you pay cash?
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

stoptothink
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Re: Your Opinion: When to start pay off Mortgage?

Post by stoptothink » Thu Dec 26, 2019 8:34 pm

mortfree wrote:
Thu Dec 26, 2019 7:53 pm
Paying off and paying down are not the same thing.

Paying down the mortgage early on has a greater impact on the amount of interest you will pay and reducing the number of payments.

Previously when I hit 100k left on a mortgage I focused on aggressively paying it down and then made the last payment in 3 years. Total length of having a mortgage was 10 years. I was 39

Then I found bogleheads and realized they probably would have told me not to pay that off.
I'm on pace to have mine done in December of next year, 5yrs to the month from when we moved in. I'll be 39 as well. After maxing out pair of 401ks, Roth IRAs, family HSA, and state limit for deduction on a pair of 529s, we've just been throwing everything left over at the mortgage. Of course, although I would love to stay here forever and be totally debt-free, wife has decided she wants to upgrade in the next 5yrs :oops:. Would love to pay cash for the next one.

I hate debt and we could not save another penny for retirement and be absolutely fine in 20yrs, so I prioritize paying down mortgage over taxable investing. Just me.

capran
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Re: Your Opinion: When to start pay off Mortgage?

Post by capran » Thu Dec 26, 2019 8:35 pm

Bought first house in our 20's, back in late 70's. Interest rate was 9.5%. loan 32k, salary 1300 month. took us 10 years to pay it off. 2nd home 72k, interest rate 5%. paid off in 4 yrs after putting prior proceeds down. salary 36k. 1993 bought current house 182k. interest rate 5%, and paid off in 4 years. Starting in 88 we were always maxing out retirement savings/deferred and Roths, and using what we were not paying in interest to do so. It was very freeing. When the markets took bad turns, I was sure glad we had paid off the house. Sure, the market has been smoking hot, but my house value probably won't drop as much as the market, so that's one small bit of security. Sign me "paid off with no regrets".

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MrBobcat
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Re: Your Opinion: When to start pay off Mortgage?

Post by MrBobcat » Thu Dec 26, 2019 8:36 pm

Frugalbear wrote:
Thu Dec 26, 2019 7:42 pm
In your opinion, when is it the right time to start to focus on paying off your mortgage?

Is there certain financial milestones one should hit prior? If so, explain.
Sometime between the kids getting done with college and before retirement.

mortfree
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Re: Your Opinion: When to start pay off Mortgage?

Post by mortfree » Thu Dec 26, 2019 8:39 pm

JoeRetire wrote:
Thu Dec 26, 2019 8:33 pm
mortfree wrote:
Thu Dec 26, 2019 8:31 pm
gmc4h232 wrote:
Thu Dec 26, 2019 8:27 pm
acegolfer wrote:
Thu Dec 26, 2019 8:22 pm
mortfree wrote:
Thu Dec 26, 2019 7:53 pm
Then I found bogleheads and realized they probably would have told me not to pay that off.
Do you regret paying off early?
Paid mine off this June. Let's just say it hasn't yet crossed my mind to go out and get another one...
Moved unexpectedly a year later.

30-year, 3.875% 200k mortgage now down to 183k (in 2 years).

So only regret is having to go through that process again.
So no longer mortfree?

Just curious - why didn't you pay cash?
Didn’t want to sell my taxable investments.

Went from a 220 home to a 400 home too so that didn’t help.

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Watty
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Re: Your Opinion: When to start pay off Mortgage?

Post by Watty » Thu Dec 26, 2019 8:40 pm

Frugalbear wrote:
Thu Dec 26, 2019 7:42 pm
Is there certain financial milestones one should hit prior?
I am a huge fan of most people having a paid off house at least by the time you retire.

One high priority would be getting rid of PMI if you are paying that.

Assuming that PMI is not an issue I would put these ahead of paying down a mortage.

(In no specific order.)

1) Build up a good emergency fund.

2) Max out all your tax advantaged accounts.

3) Build up a car fund so that will be able to pay cash when you need a replacement car.

College savings for kids is another consideration but it is too complex to really state general rules. If you can manage to get your house paid off before they start college then you can use your "mortage payment" to help fund college expenses out of your cash flow.

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JoeRetire
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Re: Your Opinion: When to start pay off Mortgage?

Post by JoeRetire » Thu Dec 26, 2019 8:44 pm

mortfree wrote:
Thu Dec 26, 2019 8:39 pm
JoeRetire wrote:
Thu Dec 26, 2019 8:33 pm
mortfree wrote:
Thu Dec 26, 2019 8:31 pm
gmc4h232 wrote:
Thu Dec 26, 2019 8:27 pm
acegolfer wrote:
Thu Dec 26, 2019 8:22 pm


Do you regret paying off early?
Paid mine off this June. Let's just say it hasn't yet crossed my mind to go out and get another one...
Moved unexpectedly a year later.

30-year, 3.875% 200k mortgage now down to 183k (in 2 years).

So only regret is having to go through that process again.
So no longer mortfree?

Just curious - why didn't you pay cash?
Didn’t want to sell my taxable investments.

Went from a 220 home to a 400 home too so that didn’t help.
Ah, that's too bad.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

retire57
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Re: Your Opinion: When to start pay off Mortgage?

Post by retire57 » Thu Dec 26, 2019 8:45 pm

Strive to be mortgage-free at least by the time you retire. Having a debt-free retirement has made all the difference to us.

Cycle
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Re: Your Opinion: When to start pay off Mortgage?

Post by Cycle » Thu Dec 26, 2019 8:46 pm

Imo one should focus in keeping the housing cost as small as possible.

U can do this by being a minimalist and living in a smaller space. By owner occupying a milti-family building. By renting out a spare space or parking spot.

I've done all those.

I paid off a mortgage in 2017 bc I thought we must be near the top of the market. Then a month ago I bought a condo with cash (again must be at the top of the market). My housing is a small part of my net worth, but that kind of market timing is something to look out for.

If u have a very low interest rate mortgage, I see no reason to ever pay it off. I had one for 2% that I wished had kept... But I was not very financially literate then. I sold that condo bc I wanted a garage, but now I don't even own a car :oops:
Never look back unless you are planning to go that way

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Re: Your Opinion: When to start pay off Mortgage?

Post by whodidntante » Thu Dec 26, 2019 8:59 pm

Gather around the campfire and your old pal whodidntante will finally solve the "should I payoff my mortgage" false dichotomy with his/her own ramblings on the subject.

Since rates are currently low, I would not seriously consider prepaying a mortgage until I was consistently maxing all tax advantaged accounts every year (except for a 529), and I had 2 years expenses in equities in a taxable account. At this point, it becomes a good choice if:
1) you want to increase fixed income to reduce the risk* of your portfolio, and the spread of mortgage prepayment is favorable compared to buying bonds.
2) you are extremely debt averse or possibly have a radio show in the South where you scream at people who use credit irrationally.

* A mortgage (like any debt you take rather than lay) is a short position in fixed income, and paying it off has the effect of reducing the risk in your portfolio, similar to buying bonds. However, the expected return of paying off a mortgage is higher for the vast majority of people than buying bonds would be today.

I am currently prepaying my mortgage due to #1 above. I don't think most people should prepay there mortgage, and I avoided it myself until the time was right for me.

If your mortgage rate is significantly above market and you will continue holding it, refi, preferably tomorrow.

Just to future proof my campfire lesson:
If mortgage rates were currently 8%, I would put it higher in the priority list.

Now, with that solved once and for all, grab yourself a stick and a marshmallow. Have some booze and a have a happy new year! :happy

poker27
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Re: Your Opinion: When to start pay off Mortgage?

Post by poker27 » Thu Dec 26, 2019 9:09 pm

I have a 2.875% mortgage and I recently began contributing to my mortgage vs my taxable. Not really sure why, but my taxable account has risen, and I would like to get rid of the debt.

After my mortgage gets down to the amount my bonds portion in my taxable is, I’ll likely pay it off. I would probably do better in the market, but but with stocks rising like crazy as of late, that’s what I’m going with. If markets were to drop, I’d probably start putting more $ back into equities. Market timing? Maybe a little

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Re: Your Opinion: When to start pay off Mortgage?

Post by grabiner » Thu Dec 26, 2019 10:42 pm

The direct financial benefit is the difference between the after-tax rate on the mortgage and the return on a low-risk bond of the same duration. If that benefit is very low, it isn't worth paying extra on the mortgage. This suggests several possible right times:

When you can no longer get a 50% or 100% return on your 401(k) contributions matched by your employer. This is the right time to pay off for a large benefit, such as getting rid of PMI or paying down enough to refinance at a lower rate.

When your mortgage interest is no longer deductible. This is a significant increase in the benefit of paying down the mortgage; a 24% tax rate means that you get only a 3.04% return from paying down 4% deductible interest, but the full 4% for paying down non-deductible interest.

When you can max out your retirement accounts. Again, this is a significant benefit, since you can get a much better low-risk return in an IRA than in a taxable account. (However, keeping money in the taxable account has some value for liquidity.)

When interest rates are low. You may want to refinance your mortgage, but if that is not profitable (say, because you paid a lot of points, or because closing costs are too high), paying down a mortgage is more attractive when the return from investing the money is low.

My own situation: I max out my retirement accounts, and interest rates are low (1.96%, 1.80% after state tax on Admiral shares of Vanguard Long-Term Tax-Exempt), but it still isn't worth paying down my mortgage because my after-tax mortgage rate is 1.78% (2.625% pre-tax, 32.2% federal and state tax; I did pay a lot of points to get that rate). If the stock market crashes, so that I can pay my nine-year mortgage off with no tax cost (and then move an equal amount from bonds to stock in my employer plan, keeping my stock exposure), then the fair comparison becomes 1.44% after state tax on Intermediate-Term Tax-Exempt, so I will pay it off.
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Re: Your Opinion: When to start pay off Mortgage?

Post by sport » Thu Dec 26, 2019 11:06 pm

poker27 wrote:
Thu Dec 26, 2019 9:09 pm
I have a 2.875% mortgage and I recently began contributing to my mortgage vs my taxable. Not really sure why, but my taxable account has risen, and I would like to get rid of the debt.

After my mortgage gets down to the amount my bonds portion in my taxable is, I’ll likely pay it off. I would probably do better in the market, but but with stocks rising like crazy as of late, that’s what I’m going with. If markets were to drop, I’d probably start putting more $ back into equities. Market timing? Maybe a little
With a 2.875% mortgage and inflation around 2%, the net rate is about 1%. If you get a tax deduction, it is even less. In addition, if you keep the mortgage, you get to pay it off with inflated dollars. I would not pay anything extra in this situation. In the future, if interest rates rise, holding the mortgage becomes even more attractive.

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Re: Your Opinion: When to start pay off Mortgage?

Post by noco-hawkeye » Thu Dec 26, 2019 11:06 pm

Watty wrote:
Thu Dec 26, 2019 8:40 pm
Frugalbear wrote:
Thu Dec 26, 2019 7:42 pm
Is there certain financial milestones one should hit prior?
I am a huge fan of most people having a paid off house at least by the time you retire.

One high priority would be getting rid of PMI if you are paying that.

Assuming that PMI is not an issue I would put these ahead of paying down a mortage.

(In no specific order.)

1) Build up a good emergency fund.

2) Max out all your tax advantaged accounts.

3) Build up a car fund so that will be able to pay cash when you need a replacement car.

College savings for kids is another consideration but it is too complex to really state general rules. If you can manage to get your house paid off before they start college then you can use your "mortage payment" to help fund college expenses out of your cash flow.
1)Yes - of course an emergency fund is first level stuff.

2) Max out all your tax advantaged accounts, but also get your retirement funding at a level where you will hit your numbers with high confidence. Like have 15x expenses at 35 yrs old (or some version of this)

3) Build up a car fund so that will be able to pay cash when you need a replacement car. (this is a form of number 1 imo)

4) Have your college savings on track where you will reasonable fund at whatever level you feel comfortable with. Maybe that is 4 yrs at a state school, but make sure you have this covered / are well on track.

5) The extra money now gets thrown at the mortgage at step 5.

Thats kind of along the lines of my thinking. I'd guess many people struggle to get past 1 & 2.

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Re: Your Opinion: When to start pay off Mortgage?

Post by grabiner » Thu Dec 26, 2019 11:18 pm

sport wrote:
Thu Dec 26, 2019 11:06 pm
poker27 wrote:
Thu Dec 26, 2019 9:09 pm
I have a 2.875% mortgage and I recently began contributing to my mortgage vs my taxable. Not really sure why, but my taxable account has risen, and I would like to get rid of the debt.

After my mortgage gets down to the amount my bonds portion in my taxable is, I’ll likely pay it off. I would probably do better in the market, but but with stocks rising like crazy as of late, that’s what I’m going with. If markets were to drop, I’d probably start putting more $ back into equities. Market timing? Maybe a little
With a 2.875% mortgage and inflation around 2%, the net rate is about 1%. If you get a tax deduction, it is even less. In addition, if you keep the mortgage, you get to pay it off with inflated dollars. I would not pay anything extra in this situation.
You are double-counting here. If you keep the mortgage, you pay it off with inflated dollars, but the returns on the investments you made instead are also in inflated dollars, so this cancels out. If you buy municipal bonds yielding 1.96% (current yield on Vanguard Long-Term Tax-Exempt) this is still worse than paying down the 2.875% mortgage unless it is deductible. If inflation is 2%, the munis didn't keep up with inflation, while the mortgage grows faster than inflation.

If the mortgage is deductible at 24%, then 2.875% becomes 2.19% after tax, and that is close enough to break-even that it would be reasonable to keep because of the option to pay off, keep, or refinance later.

Incidentally, your strategy isn't necessarily market timing. If the market drops, you want to sell bonds to buy more stocks. This is independent of whether you want to pay off your mortgage; you could sell bonds in your IRA to buy more stocks, and pay off your mortgage by selling taxable bonds (and, if necessary, selling taxable stocks which no longer have a capital gain and moving an equal amount from bonds to stocks in your IRA.)
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grabiner
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Re: Your Opinion: When to start pay off Mortgage?

Post by grabiner » Thu Dec 26, 2019 11:25 pm

mortfree wrote:
Thu Dec 26, 2019 7:53 pm
Paying off and paying down are not the same thing.

Paying down the mortgage early on has a greater impact on the amount of interest you will pay and reducing the number of payments.
But the percentage return is the same. If you pay down a ten-year mortgage, you save interest for ten years, but you lose ten years of investment returns on the money you used. If you pay down a two-year mortgage, you save interest for two years, but after those two years, you can invest the money you are no longer making as mortgage payments in an eight-year bond to get a ten-year return.

There are two reasons that paying off a mortgage is more attractive than paying it down.

The mathematical reason is that the duration is shorter, and thus the bond return to use for comparison is lower. If you sell a ten-year bond to make an extra payment on a ten-year mortgage, you break even if the rates are the same. If you sell a portfolio of 1-10 year bonds with a duration of five years to pay off the mortgage, you also break even if the rates are the same.

The non-mathematical reason is that paying off the mortgage improves your cash flow; with no mortgage payment, you don't need as much in your emergency fund, and you can stand a longer period of unemployment. (This is no longer relevant in retirement; you might choose to pay off your mortgage in retirement, but if you don't pay it off, you can keep money in your IRA which is dedicated to making the mortgage payments.)
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Re: Your Opinion: When to start pay off Mortgage?

Post by poker27 » Thu Dec 26, 2019 11:30 pm

sport wrote:
Thu Dec 26, 2019 11:06 pm
poker27 wrote:
Thu Dec 26, 2019 9:09 pm
I have a 2.875% mortgage and I recently began contributing to my mortgage vs my taxable. Not really sure why, but my taxable account has risen, and I would like to get rid of the debt.

After my mortgage gets down to the amount my bonds portion in my taxable is, I’ll likely pay it off. I would probably do better in the market, but but with stocks rising like crazy as of late, that’s what I’m going with. If markets were to drop, I’d probably start putting more $ back into equities. Market timing? Maybe a little
With a 2.875% mortgage and inflation around 2%, the net rate is about 1%. If you get a tax deduction, it is even less. In addition, if you keep the mortgage, you get to pay it off with inflated dollars. I would not pay anything extra in this situation. In the future, if interest rates rise, holding the mortgage becomes even more attractive.
I’m comparing bonds in taxable to my 2.875% mortgage (I don’t expect to be able to deduct any mortgage in 2020). I’m splitting my extra cash between my three funds in my taxable, and paying down the principal. I never thought that I would be paying down a 2.875% mortgage, but it kinda feels right. Ask again in 4 months and I might be doing something different.

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Re: Your Opinion: When to start pay off Mortgage?

Post by grabiner » Fri Dec 27, 2019 12:12 am

poker27 wrote:
Thu Dec 26, 2019 11:30 pm
I’m comparing bonds in taxable to my 2.875% mortgage (I don’t expect to be able to deduct any mortgage in 2020). I’m splitting my extra cash between my three funds in my taxable, and paying down the principal. I never thought that I would be paying down a 2.875% mortgage, but it kinda feels right. Ask again in 4 months and I might be doing something different.
And I would be paying down my 2.625% mortgage, except that it is 100% deductible (I am single, and am over the standard deduction with state taxes and charity alone). At 1.78%, it isn't worth paying down.
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Re: Your Opinion: When to start pay off Mortgage?

Post by geerhardusvos » Fri Dec 27, 2019 12:17 am

Never pay it off. If you have to for your peace of mind, start going aggressive 5 to 10 years before retirement and clear it out
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Re: Your Opinion: When to start pay off Mortgage?

Post by babystep » Fri Dec 27, 2019 12:38 am

Frugalbear wrote:
Thu Dec 26, 2019 7:42 pm
In your opinion, when is it the right time to start to focus on paying off your mortgage?

Is there certain financial milestones one should hit prior? If so, explain.
When after tax return on mortgage pay off is better than the alternatives.

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